CrossAmerica Partners LP — Q1 2017 10-Q
Reporting period: Three months ended March 31, 2017. CrossAmerica distributes motor fuel wholesale and retail, operates retail locations, and owns or leases fuel-site real estate. Results are unaudited; the partnership notes that first-quarter results are seasonal and not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $469.3 million | $367.7 million |
| Gross profit | $37.4 million | $37.2 million |
| Gross margin | 8.0% | 10.1% |
| Operating income | $5.6 million | $5.9 million |
| Consolidated net income | $1.7 million | $1.8 million |
| Net income available to limited partners after IDR distributions | $0.7 million | $1.0 million |
| Basic earnings per common unit | $0.02 | $0.03 |
| Cash from operating activities | $21.8 million | $18.6 million |
| Distributable cash flow (non-GAAP) | $16.9 million | $17.3 million |
| Distribution coverage ratio (non-GAAP) | 0.82x | 0.88x |
Revenue rose 28%, largely from higher motor-fuel prices and acquisitions, while gross profit was nearly flat and gross margin contracted. Interest expense increased $1.6 million to $6.7 million, reflecting higher borrowings and interest rates. A $2.7 million income-tax benefit, mainly related to losses at taxable corporate subsidiaries, contributed to reported net income.
Cash, debt, and liquidity
- Cash was $5.8 million at March 31, 2017, versus $1.4 million at December 31, 2016. Current assets were $60.7 million and current liabilities $71.4 million.
- Total debt and capital lease obligations were $478.1 million, including $448.5 million drawn on the $550 million revolving facility. The facility was secured by substantially all partnership assets.
- Facility availability after covenant restrictions was $85.7 million at quarter-end and $92.2 million as of May 4. The quarter-end borrowing rate was 3.95%; a one-percentage-point rate change was estimated to affect annual interest expense by about $4.5 million.
- Leverage was 4.23x at quarter-end; the partnership reported compliance with its financial covenants. Net cash used in investing was $2.1 million, while financing activities used $15.3 million. Capital expenditures were $2.5 million, including $0.4 million of sustaining capital.
Material changes and operating performance
- Wholesale revenue increased substantially with higher crude and fuel prices and acquired operations. Wholesale gross profit rose to $29.3 million from $25.9 million; total distributed gallons were broadly steady at 238.4 million versus 236.2 million.
- Retail gross profit fell to $8.1 million from $11.2 million. Management cited lower fuel margins and volume, and conversions of company-operated sites to dealer-operated sites; lower retail operating expenses partly offset the decline.
- Management reported $1.2 million lower general and administrative expense, primarily due to integration and cost savings, offset by $1.4 million higher depreciation, amortization, and accretion expense, mainly from acquisitions.
- Q1 2017 cash distributions paid were $0.6125 per unit. A $0.6175 per-unit distribution was declared for the quarter, payable May 15, 2017. Distributions are discretionary, and coverage was below 1.0x.
Outlook, risks, and contingencies
- Management expected 2017 fuel volumes to exceed 2016 levels, rent income to increase with acquisitions and further dealer conversions, and continued volatility in energy markets. It planned to pursue acquisitions opportunistically, subject to suitable targets, financing, and covenant capacity; no specific earnings guidance was provided.
- The proposed CST merger with Circle K’s parent was expected to close in Q2 2017, subject to U.S. and Canadian regulatory approvals. The transaction would transfer control of CST’s general-partner interest, 20.2% limited-partner interest, and all IDRs. The outlook did not incorporate merger effects.
- Fuel-margin exposure includes fixed-markup wholesale contracts and market-sensitive DTW and retail sales; the partnership did not hedge fuel purchases. It estimated a $10-per-barrel crude-price change would affect annual wholesale gross profit by about $2.2 million through supplier discounts. Seasonality, competition, interest rates, financing access, and weather are additional risks.
- Customer and supplier concentration is notable: DMS and affiliates accounted for 14% of wholesale volume and 23% of rent income; CST accounted for 20% of rent income. ExxonMobil, BP, and Motiva supplied 28%, 27%, and 22% of wholesale fuel purchases, respectively.
- A former employee’s lawsuit alleges severance-related claims of approximately $1.6 million; the partnership said it would contest the case. Management did not expect the disclosed legal proceedings, individually or collectively, to materially affect results, but outcomes remain uncertain.
- Management expected adoption of the new lease accounting standard to materially affect the balance sheet. It did not expect the revenue standard to materially affect the financial statements, though disclosures would change.
Important facts for investors to verify
- Whether the CST merger closed as expected and how control, IDR ownership, and related-party arrangements changed.
- Whether operating cash generation and distributable cash flow can support distributions, given 0.82x reported coverage.
- Debt covenant headroom, revolver availability, leverage, and sensitivity to interest-rate increases.
- Whether management’s volume and rental-income expectations materialized, and the continuing effects of retail-to-dealer conversions on margins.
- Developments in the severance litigation, environmental obligations, and material customer and supplier concentration.